Here are some common misconceptions about mortgages, lenders, and the loan process:
1. Pre-qualified is the same as pre-approved.
While these two are related because you need a letter for either, they are very different. You can get pre-qualified online in minutes by answering a few questions about your financial situation. Typically the pre-approval process is much more thorough. Lenders take a look at your financials before a pre-approval decision is made. If approved, you’re given a maximum loan amount based on how much the bank is willing to loan you. These days, a pre-qualification isn’t worth much. Sellers prefer a pre-approval since that’s a much more accurate representation of your ability to buy the home.
2. Being pre-approved guarantees that you’ll get a home loan.
There are thousands of stories of homebuyers who were approved for a mortgage only to find out later that they’ve been denied. There are many reasons why a mortgage is denied after being approved. Some of the most common causes include changing jobs, adding additional debts, and not having enough money to cover the costs of getting the mortgage.
It’s essential that once you’re pre-approved for a mortgage that you don’t make any rash decisions. If you are thinking about making another financial change after recently being pre-approved for a home loan, you should first consult with your mortgage advisor to make sure you’re not sabotaging your pre-approval.
3. The mortgage process is difficult.
This is the classic misconception. The mortgage process has a reputation for being confusing and stressful. In reality, it’s all about the lender. Some lenders don’t communicate well, and that makes it difficult for borrowers. But at McLean Mortgage, we pride ourselves on making mortgages smooth and hassle-free for our clients. Our mortgage team guides you through the process every step of the way, making it as easy as possible.
4. Income is the only thing that determines how much you can borrow.
The amount of income a borrower makes is not the only factor that determines the loan amount. Debts, such as car payments and student loans, impact how much you can borrow to buy a home. These variables, along with others, affect the loan amount. Consult with your mortgage advisor to see where you stand.
5. I’ve been self-employed for six months, so all of my income will count towards my mortgage application.
As a self-employed individual, you can only count your income towards your mortgage calculations if it meets the following guidelines:
- You need to have proof of 24-months (2-years) of self-employment history.
- Or you may qualify with 12-months of self-employment if you have previous experience in that field, and your income is equal to what you earned before becoming self-employed.
6. I don’t make enough money to buy a home.
If you can afford to pay rent, you may be able to afford to make a monthly mortgage payment. To find out how much mortgage you can afford, talk to a mortgage advisor.
7. I can find a home to purchase first and then think about financing.
You should get pre-approved or, at the very least, pre-qualified before you start looking at homes. This protects the sellers from being misled and thinking you can purchase the house. This also guards you as a buyer from falling in love with a home only to learn you can’t qualify for a loan. It is important to find a lender before you start on your home-buying journey. The pre-approval process will give you a good idea of your price range and any credit issues you may need to fix.
8. All mortgages are the same.
Buyers often believe that a $150,000 mortgage with a 5% interest rate will have the same payment across all lenders. This is not the truth. Closing costs and fees may vary from one title company and lender to another, adding to the payment.
9. A mortgage is only principal and interest.
Buyers often believe that only the amount they borrow and the interest rate will determine their monthly mortgage payments. In reality, monthly mortgage payments include taxes and insurance, which can add several hundred dollars to those monthly payments.
10. A 30-year mortgage is always the best.
Many home buyers believe that getting a 30-year mortgage is the best, but this means you could potentially be missing out on a better mortgage product.
On a 15-year mortgage, the monthly payment will be higher when comparing it to a 30-year mortgage. But the total amount of interest paid is significantly lower. With a 15-year mortgage, the amount of equity grows faster due to the higher amount of principal being paid as compared to a 30-year mortgage.
30-year mortgages are helpful for borrowers who have lower down payments or don’t have a lot of money in reserves. But it is not always best for everyone.
11. Adjustable-rate mortgages (ARM) are a bad idea.
There are situations in which an adjustable-rate mortgage term can be a good idea. With a 5-1 ARM, you will have a low-interest rate for the first five years of the loan, which will adjust annually after the 5-year term. If planning on paying off your mortgage or selling within five years, it could make a lot of sense. The rate can be a full percentage point less than a 30 year fixed rate.
12. You need a 20% down payment to buy a house.
In the past, homebuyers needed to put 20% down when they were buying a house. In 2020, most loans require less than 6% down. Most FHA loans only need as little as 3.5% down, and, if you qualify, loan programs through the VA often don’t require a downpayment at all.
There are many assistance and grant programs to help you with a down payment, especially if you are a first-time homebuyer. Your mortgage advisor can help you see which programs are available in your area.
13. A down payment is your only upfront cost.
While the down payment is an upfront expense to buying a home, it isn’t the only one that you need to take into account. There are also closing costs to consider. These fees account for all the changes necessary to facilitate the transaction. They usually add up to 1% – 2% of the sale price. Closing costs are typically split between the buyer and the seller.
14. You need enough for the down payment in savings.
It’s unwise to use all of your savings for a down payment, and most lenders won’t accept it. They will want to see at least two months of mortgage payments in reserves. Let’s look at an example. Say you are buying a $400,000 home with a down payment of $14,000. You will pay about $400 for a home inspection, another $500 for a home appraisal, and approximately $3600 for two months of mortgage payments in reserves. In this example, you will need to have about $18,500 in savings to be able to purchase a $400,000 home, assuming a 3.5% down payment.
15. You can’t use gifts or grants for your down payment.
Many mortgage companies allow down payments to come from any source as long as those sources are documented.
This includes gifts from parents or friends, but could also be paid with grants from non-profits or other sources such as company-sponsored home-buying programs. Your mortgage advisor can help you find down payment assistance programs in your area.
16. There are no extra costs of homeownership.
It can be a big surprise as a first-time homebuyer that you will have additional expenses on top of their monthly mortgage payment, such as property taxes, homeowners insurance, and regular maintenance or a homeowners’ association or co-op board fees.
You will want to build these expenses into your budget.
17. If you put down less than 20%, you are required to get Private Mortgage Insurance (PMI).
Private Mortgage Insurance is there to protect a lender from risk. It is placed on many home loans if you’re putting less than 20 percent down. It protects lenders in case the home buyer defaults on their loan. PMI will increase your total monthly payment. However, you can buy a home with less than 20 percent down and avoid mortgage insurance.
One way to avoid PMI is with a combination first and second mortgage — often called a piggyback loan — in essence, the first mortgage is capped at 80 percent of the home’s value, and you get a second mortgage for the balance of your purchase.
Another way is by working with the lender on Lender Paid PMI. For example, McLean Mortgage has an exclusive program called the Mortgage Insurance Payment EliminatorSM. Visit here for more information.
18. You have to pay insurance and taxes with your mortgage payment.
Many homeowners choose to have their lenders pay the insurance and tax bills yearly. They have borrowers set up an escrow account where the additional amounts are deposited when you make your monthly mortgage payment. However, you do not have to have an escrow account—as long as you put down 20% or more when you bought your home. Some buyers choose to pay extra with their mortgage to keep their money in their savings accounts to earn interest as long as possible. You could choose to have an escrow account even if you paid 20% down.
19. Only borrowers with no money or poor credit can qualify for FHA loans.
The FHA loan is one of the most popular mortgage products. There is a common misconception that FHA loans are only for borrowers with no money and poor credit. FHA loans are an excellent option for borrowers who don’t have a significant down payment or lower credit, but other types of buyers can qualify. The FHA loans usually have low-interest rates. This is why a borrower with great credit and money available might still want to take advantage of an FHA loan.
20. If you’re denied for a mortgage, you will never qualify in the future.
If you happened to be denied when applying for a mortgage, it doesn’t mean you will never qualify; it just means that right now, your financial situation is not the best for a loan. Talk to your mortgage advisor about improvements you can make to your credit or income to secure a mortgage in the future.
21. Bankruptcy, judgments, and collections will keep you from being able to get a mortgage.
It’s unfortunate when people go through bankruptcy or have judgments filed against them. Depending on the type of bankruptcy, whether it was chapter 11 or 7, there is a waiting period before being able to qualify for mortgage financing. It’s crucial that if you do go through bankruptcy or have judgments that you discuss this with your mortgage advisor. They will help guide you on the steps to take to secure funding in the future.
22. It is best to pay off a mortgage as quickly as possible.
A mortgage is one of the most significant debts someone can have. Common sense might tell you it makes sense to pay off a mortgage as quickly as possible. But this is not always the best idea. Interest rates for home loans have been low for many years. Logically, it makes sense to pay off any other high-interest debts before paying off a mortgage.
As an example, let’s imagine you had a student loan of $100,000 at an interest rate of 8% and a mortgage of $100,000 with 3.5% interest. It makes sense to pay off the 8% loan before paying off the loan at 3.5%
23. You must get a loan from the lender that pre-approved you.
Getting pre-approved by a lender should be your first step towards getting your new home loan. However, you don’t need to work with that lender once you’re ready to purchase. It’s in your best interest to compare loan options and terms from several lenders. There are many types of mortgage options and programs to explore. Some may be able to save you tens of thousands of dollars over the lifetime of your loan.
24. I should always refinance my mortgage if the new rate is lower.
A good rule of thumb is that refinancing might be worthwhile if current interest rates are at least close to a percentage point lower than your current loan’s rate. However, if you are planning on moving soon, refinancing might not make sense. Be sure you intend to remain in the home long enough to offset the costs of refinancing.
25. Lenders will sell your personal information.
Mortgage companies won’t sell your personal information to telemarketers. However, the credit bureaus might. When you apply for a mortgage loan, your mortgage advisor will run a credit inquiry through the major credit-reporting agencies: Equifax, Experian, and TransUnion.
When this happens, an inquiry will show on your credit report. If that inquiry is identified as related to a mortgage, credit-reporting agencies know you’re trying to obtain a loan. This is referred to as a “trigger lead” to other mortgage lenders who are looking for high-quality leads.
26. Mortgage interest rates are affected by the Federal Reserve’s fund rate.
A 30-year mortgage interest rate is not directly affected by the Federal Reserve’s funds rate. Interest rates on some adjustable mortgages may be tied to the prime rate, which is more closely linked to the Federal funds rate. But this doesn’t mean that one impacts the other.